1. Cost and Production It’s July 1 and Levi is just out of residency, with loans
ID: 1204356 • Letter: 1
Question
1.Cost and Production
It’s July 1 and Levi is just out of residency, with loans that he is able to pay off at a very slow rate of $520 per year. He has several job offers that would pay him $1000 a week, for jobs that he likes just as much as running his own office. But he has decided to open a private office and has leased an office space for a year at a cost of $800 a week; once Levi signs the lease, he is obligated to pay the rent for the year. He is able to see 60 patient visits a week, but if he hires assistants, his clinic output can be greater, according to the chart below.
The clinic receives $18 per visit, and the salary of an assistant is $500 per week.
a) Fill in the missing values for total weekly cost and incremental cost
b) Fill in the missing values for total weekly revenue and incremental revenue
c) Is it better to hire one assistant or two assistants?
Professional Assistants
Visits per Week
Total Cost
Total Revenue
Incremental Cost
Incremental Revenue
Revenue minus Cost
0
60
1
135
$ 2,430
$1,350
2
180
$500
3
210
4
220
$ 180
d) How many assistants should Levi hire?
e) Just as he is about to sign the lease for the next year, Levi is offered a job for $2000 a week, and would enjoy it just as much as his current situation. Should he sign the lease?
f) The following terms from our course may (or may not) be relevant here. Briefly identify an aspect of this exercise that is an example of:
sunk cost,
incremental cost,
input price,
fixed cost,
opportunity cost
g) Extra Credit: If Levi’s job offer for $2000 a week comes in January 1, 6 months into his lease, does your advice to him stay the same?
Professional Assistants
Visits per Week
Total Cost
Total Revenue
Incremental Cost
Incremental Revenue
Revenue minus Cost
0
60
1
135
$ 2,430
$1,350
2
180
$500
3
210
4
220
$ 180
Explanation / Answer
Answer of Part a and b:
Total cost = Leasing cost + cost of salary of assistants
Thus,
Total cost when 0 assistant = 800+ 0 = 800
Total cost when 1 assistant = 800+1*500 = $1300
Similarly, total cost is calculated for each level of assistants hired.
Total Revenue = Visits per week * revenue per visit
Total Revenue when 0 assistant = 60*18 = $1080
Total Revenue when 1 assistant = 135*18 = $2430
Similarly, total revenue is calculated for each level of assistants hired.
Incremental cost = Difference in total cost due to increase in one more assistant
Incremental cost for 1 assistant = (1300 – 800)/ (1-0) = $500
Incremental cost for 2 assistants = (1800 – 1300)/(2-1) = $500
Similarly, Incremental cost is calculated for each level of assistants hired.
Incremental revenue = Difference in total revenue due to increase in one more assistant
Incremental revenue for 1 assistant = (2430 – 1080)/(1-0) = $1350
Similarly, it will be calculated at other levels also.
C.
Hiring of 2 assistants will be relatively better than the hiring of 1 assistant because, net profit earned with 2 assistant is higher than the net profit earned with 1 assistant.
Net profit with 2 assistants = $1440
Net profit with 1 assistant = $1130
D.
Levi should hire 3 assistants to get the maximum net profit of $1480. Also, up to this level, incremental revenue is higher than the incremental cost.
Professional Assistants Visits per Week Total Cost ($) Total Revenue ($) Incremental Cost ($) Incremental Revenue ($) Revenue minus Cost ($) 0 60 800 1080 280 1 135 1300 2430 500 1350 1130 2 180 1800 3240 $500 810 1440 3 210 2300 3780 500 540 1480 4 220 2800 3960 500 180 1160Related Questions
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